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Euro to Pound Sterling Rally EUR GBP Forecast to Fizzle Following Spanish Election Result

December 22, 2015 - Written by Frank Davies

GBP/EUR Exchange Rate Declines Yesterday despite Spanish Political Uncertainty



In another apparently counter-intuitive move, the Pound Sterling (currency : GBP) lost ground against the euro (currency : EUR) during yesterday’s session, in spite of the confusing and potentially divisive result from Spain’s weekend general election.

Spain’s Primera Liga is invariably a two horse race between footballing giants Barcelona and Real Madrid and the Iberian nation’s political scene has for decades followed the same pattern, with election results yielding a win for either the Socialist or the centre-right Popular Party.

However, Sunday’s General Election brought a sea-change in Spain’s political landscape, with two new political forces, Ciudadanos and Podemos, garnering over a third of the votes cast.

Prolonged Period of Spanish Political Wrangling Likely to Weigh on Euro-area Investor Confidence



Political analysts now fear that Madrid will witness a prolonged period of political wrangling, with no overall control for any party and no obvious coalition evident.

One factor has become clear following comments from the Socialist leader Pedro Sanchez confirming that he will not back any alliance lead by existing centre-right Prime Minister Mariano Rajoy.

Sanchez’s dismissal of any prospect of a ‘grand coalition’ has handed an inordinate amount of power to the two emerging minor parties.

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Podemos would appear to be in the strongest negotiating position of the two, having gained 69 seat and almost 21% of the popular vote; the party is a staunchly anti-austerity / anti-EU organisation and considers itself closely affiliated to Greece’s Syriza party, as well as Britain’s UKIP.

Any suggestion during coming weeks that Podemos might grasp a share of power in Spain, making a scrapping of elevated taxes and stringent spending controls all the more likely, could shake the shared currency.

GBP/EUR Exchange Rate Dropped into 1.3600s Yesterday but Losses Predicted to be Short-Lived



The potential that it might take some time to form a new Spanish government, and the relatively high likelihood that the new administration will jettison the ‘sound money’ policy which has placated Spain’s numerous creditors over the past four years, could serve to weaken support for the euro (currency : EUR) during coming weeks.

However, yesterday’s snapshot reaction from the markets was by no means euro-negative, with the shared currency gaining ground against Sterling.

The move sent the GBP EUR exchange rate down into the 1.3600s for the first time since the second half of October. Analysts forecast that these gains are by no means guaranteed to stick.
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